RUSAL has received heavy scrutiny from Hong Kong's financial regulators, thanks to the company's debt load, outsider status and controversial founder, Russian billionaire Oleg Deripaska. The IPO priced at the middle of an indicated range, two sources familiar with the deal said on Friday, a sign that may show that demand wasn't strong enough to hit the top end.
Still, given RUSAL's debt load and the other risks, the price shows that institutions were willing to back the IPO. "Even though it's high risk, institutional investors invested in the IPO because it's the first Russian company to list in Hong Kong, and because they see further upside to aluminium prices this year," said Steven Leung, director of institutional sales at UOB-Kay Hian. RUSAL chose Hong Kong in part because the company's main growth market for aluminium is in China and the ability to tap a new class of investor there.
So far, Russian companies have taken the HKEx's bait. On Thursday, a top executive from Russian Railways, the country's large, government-run rail operator, said it was eyeing to list various units on HKEx. Hong Kong produced more than $30 billion worth of IPO proceeds last year, more than any other exchange globally. RUSAL sold 1.61 billion new shares, or just under 11 percent of its enlarged share capital, at HK$10.80 each, the sources told Reuters. The IPO's indicated price range was HK$9.10 to HK$12.50.
The large chunk of $16.8 billion in borrowed money is owed to VEB, the Russian government's financial vehicle whose supervisory council is chaired by Prime Minister Vladimir Putin. RUSAL's overall value is around $26 billion. UC RUSAL will also list shares in Paris in the form of Global Depository Shares (GDSs). The offer price per GDS is US $28.08 or EUR 19.91, with each GDS representing 20 ordinary shares.
The offer price of HK$10.80 values the company at 12 times EV/EBITDA - a measure of cash flow, according to London-based Independent International Investment Research. By comparison, peers Aluminium corp of China (Chalco) trades at 11.2 times 2010 basis EV/EBITDA, while US-based Alcoa trades at 11 times, according to a Merrill Lynch research report.
One source close to the deal said the recent drop in Chalco shares had given some investors hesitation when considering RUSAL's final IPO price. Chalco's Hong Kong shares have fallen about 15 percent since January 11. All sources quoted in the story declined to be identified because they were not allowed to speak publicly about the deal. RUSAL's trading debut is set for January 27, under the symbol "486". Assuming the company exercises the overallotment the company will increase the size of the IPO to $2.56 billion.
Hong Kong's financial regulators are aware that hosting companies from abroad entails risks, especially from industries the listing committee is generally unfamiliar with. Another issue surrounding the offering is Deripaska himself, whose oligarch status and visa issues with the United States has brought added attention to the company and the IPO. "Fundamentally speaking, investors should avoid buying into RUSAL, as it bears the hugh debt burden and in terms of valuation, it is expensive. Investors have plenty of choice from the market after the recent correction of the stock market," said Y.K. Chan, a strategist at Phillip Capital Management.
The IPO was eventually blocked from retail investors as a precaution, although some of the risk was reduced on Thursday when Russian lenders Sberbank and VEB agreed to refinance a $4.5 billion loan due on October 29. Since the deal became a play for big institutional investors, who cornered most of the shares, analysts expect its trading debut on January 27 to display a good performance.